By Hayden Briscoe and Anthony Chan, AllianceBernstein
The liberalisation of China’s currency and capital account is under threat as the renminbi falls, capital outflows intensify and foreign reserves dwindle. Will the country forge ahead with its reforms or pause to allow the market to settle down? Both, in our view, have their pros and cons.
China’s policymakers face a major conundrum: as the renminbi’s volatility has increased, capital outflows have intensified and depletion of foreign reserves has accelerated (down some $663bn from their June 2014 peak) as a result of market intervention to stem the renminbi’s precipitous decline.
Consequently, Beijing needs to address the “impossible trinity” problem — that is, the fact that no government can control interest and exchange rates while allowing free capital flows. Read more
The Chinese are watching a new storm unfold in their financial markets, only months after being bombarded with news of their country’s “historical victory” when the renminbi was designated an official reserve currency under the IMF’s SDR regime in November.
Inclusion in the SDR has turned out to be a pyrrhic victory, as China’s capital outflows have only accelerated. China lost as much as $108bn in foreign reserves in December, despite a record trade surplus of over $60bn. From a peak of nearly $4tn a year and a half ago, it is now left with $3.33tn in foreign reserves. Read more
“Living in a world strewn with the wreckage of the Soviet empire it is hard for most people to realise that there was a time when the Soviet economy, far from being a byword for the failure of socialism, was one of the wonders of the world – that when Khrushchev pounded his shoe on the UN podium and declared, ‘We will bury you’, it was an economic rather than a military boast”. Paul Krugman (1994)
When in 1959, Nikita Khrushchev visited the Unites States, the spectacular economic growth recorded by the Soviet Union was commonly regarded as a challenge to the supremacy of the western model of democratic capitalism. Impressive statistics, such as its manufacturing output of tractors, mesmerised western opinion formers. Newsweek warned that the Soviet Union might well be “on the high road to economic domination of the world”. Read more
By Ronald Cheng, Bingna Guo, Sean Wu, O’Melveny & Myers
Chinese companies are by no means immune from the cyber attacks plaguing firms all over the world. More and more are suffering data breaches, which can result in the leakage of customer information, the denial of service, and the prospect of litigation. In July 2015, the national cyber-security emergency response unit received reports of some 11,800 “cyber incidents”. Xi Jinping, the president, has made cyber security an issue of national security.
Partly in response to such mounting cyber security issues, the Chinese government adopted the National Security Law on July 1, 2015. The law for the first time addressed the concept of cyber security and advocated the prevention and punishment of online crime, but did not specify particular measures or punishments. In addition, the law mandated the “national security review and oversight” of all “internet information technology products and services,” naming a pretty broad swath of industries that could be facing more government scrutiny. Read more
China’s economic growth surprised on the upside in the third quarter. Yet markets will probably remain fixated on the economy’s slow-down and on the devaluation of the renminbi in August. We are in a world where volatilities rule, economic opinions differ and geopolitical conspiracy theories abound.
The mainstream view on the Chinese economy is that it will slow considerably, and only return to healthy growth if it can be “rebalanced” away from investment and exports to a household consumption-driven model. This view is incomplete at least, and misguided in some aspects.
The Chinese economy, over the next two decades before China becomes a high-income country, will be driven by four engines. Read more
By Derek Scissors, American Enterprise Institute
Stock market volatility and a small currency devaluation have in the past few months caused the financial community to take note of Chinese economic weakness. A natural question is what effect this weakness will have on the rest of the world. The answer is very little, with most important reason being that China has not truly contributed to the global economy for at least four years.
The idea that Chinese weakness threatens the world economy melds a number of misconceptions. The first is that the weakness is a new phenomenon. It was actually the initial stock market climb and a rising renminbi that were somewhat surprising; the ensuring partial corrections were late in coming, if anything. Read more
By Spencer Lake, HSBC
Chinese companies have been stepping up their global investment spree in the past 12 months. Mergers and acquisitions by private Chinese investors are becoming the key drivers of the country’s outbound direct investment.
In what has been called the ‘Third Wave’ of China outbound direct investment (ODI), the focus of investment has been on companies in the developed economies in high-tech and services. Previous ‘waves’ have focused on supporting developing economies and investing in commodities and extraction industries. Read more
A month ago, in the largest military parade held on Red Square since the days of Stalin, one foreign guest drew as much attention as the fearsome hardware on display. While leading the celebrations of the 70th anniversary of victory in what Russians call “the Great Patriotic War”, Vladimir Putin had by his side the congenial Chinese president, Xi Jinping.
President Putin hoped Xi’s presence would symbolise a new, multipolar world order, with Moscow and Beijing playing leading roles. Ultimately, Russian strategic thinking continues to assume, as it has since the days of the Tsars, that military and geopolitical power precede and largely determine a nation’s wealth and prestige. Read more
Even Western executives who are good at geography may have a hard time picking out Surat, Foshan and Porto Alegre on a map. Yet over the next decade, each of these cities will contribute more to global economic growth than Madrid, Milan or Zurich.
While China’s move to cut interest rates this month has sparked some concern about emerging-market growth, , we see no let-up in one of the most disruptive trends of our time: the shift of the world’s center of economic gravity from advanced economies to the developing world, and in particular, to rapidly growing cities in Asia, Latin American and Africa. Even at 6 to 7 per cent growth, China is adding the equivalent of a Canada to the global economy every two years.
We are currently living through the biggest mass migration from countryside to cities in human history. The global population of cities is growing by 65m people annually – that’s the equivalent of 7 Chicagos a year, every year. Between now and 2025, we calculate that 440 cities in developing countries will generate nearly half of global GDP growth. Read more
By Wesley Wu-Yi Koo and Lizhi Liu
Behind China’s impressive economic rise is the biggest human migration in history. By 2013, some 269m rural residents had become migrant workers in cities, offering cheap labour and sustaining urban growth. However, unable to register and settle their family members in the cities, these migrant workers are forced to leave behind children, spouses, and old people in the villages. This has taken a tremendous toll on the rural society.
Today, there are 61m “left-behind children” and 40m “left-behind elderly” in Chinese villages. Some 79 per cent of the left-behind children are under the care of grandparents, who are often uneducated and lack parenting resources and energy. As a result, the academic scores of 88 per cent of these children fall below what would be the passing line in cities. Read more
Noticeable progress has been made recently in Chinese companies in the areas of capital structure, management and employee incentivisation.
It is has long been said – with some justification – that aligning interests between stakeholders in China was almost impossible. Consequently the majority holder, historically the government in most instances, would dictate expansion plans based on broader economic objectives rather than narrower shareholder return motivations. Read more
Arguably the most revealing English translation of the French verb ‘étonner’ – at least in the context of Napoleon’s famous quip about China – is ‘to astonish’. “Ici repose un géant endormi, laissez le dormir, car quand il s’éveillera, il étonnera le monde” so the Corsican is said to have noted. “Here lies a sleeping giant, let him sleep, for when he wakes, he will astonish the world.”
Some 200 years later, that giant has awoken and Napoleon was right: China is now astonishing the world. In the past three decades, it has roused itself from a slumber to a state of almost unimaginable vibrancy. The roll-call of economic trophies it now claims is daunting: largest exporter, importer, foreign exchange reserve owner, commodity consumer, luxury goods market, most car sales, most internet users, even (in purchasing power parity terms) biggest economy. Read more
The ever ingenious Chinese financial system has developed a new kind of shadow bank – insurance companies.
China’s $586bn stimulus package in 2009 caused a flurry of lending through the country’s financial arteries. Some of this money ended up leaking out of the banks into unofficial channels, including the country’s state banks and the giant provincially-owned pseudo banks called Trust Companies. By the end of 2014, these off-balance sheet loans accounted for 18 per cent of all financing, up from less than 2 per cent a decade earlier. Read more
The first whispers of worry about a Chinese property bubble surfaced in late 2009. Since then, the local real estate market has quickened and slowed in line with government measures to stoke or cool the market, but has never crashed. Nonetheless, some market watchers insist that the Chinese property bubble will burst one day. Recent sector weakness has given them further ammunition, as has the near collapse of Kaisa, a mid-sized Shenzhen-based developer.
Until December 2014, Kaisa’s finances were perceived to be strong and sales were rising. Now its survival is at the mercy of lenders and rivals. Its woes started when the government halted some of its Shenzhen projects in December without giving a reason. The chairman abruptly resigned, while debts to banks and bondholders have gone unpaid and the firm is in the process of being acquired by its competitor. It has yet to reach a consensual solution with its creditors. Read more
After China’s notable political success in registering more than 35 applicants for funding membership of the yet to be launched Asia Infrastructure Investment Bank (AIIB), some important issues remain to be addressed that will determine the long term success of the new institution.
Scope of intervention: China-centric or Asia-focused? It is no coincidence that the set-up of the bank comes at the same time Beijing is rolling out its “one road, one belt” action plan. The revival of the Silk Road is part of the charm initiative aiming at winning greater consideration from neighboring countries as much as fostering trade relationships. Read more
By Andy Rothman, Matthews Asia
Will China’s real estate market crash? No, not in my opinion. China’s residential property market is significantly softer now. But I believe there is very little risk of a crash. House prices are stabilising in China, and are likely to rise again by the second half of this year on a year-over-year basis.
But keep in mind that because of the base effect, prices are likely to fall year-on-year at a steeper rate through much of the first half of this year, leading to a growing chorus of predictions of a housing crisis. Read more
By Joel Backaler, Author of “China Goes West”
On March 22, China National Chemical Corporation (CNCC) reached an agreement with the controlling shareholders of Italian tire-maker Pirelli to move forward with a €7bn takeover. If successful, the deal will be one of the largest overseas acquisitions of a European company by a Chinese firm to date.
While CNCC may not have the global recognition of Chinese firms such as Alibaba, Huawei and Lenovo, CNCC and its chairman, Ren Jianxin, are experienced international acquirers. Ren has acquired either directly, or via government driven consolidation, 107 domestic firms and four international businesses in France, Australia and Israel. Read more
By David Mann of Standard Chartered
Much of the negativity about world growth prospects at the moment seems to stem from the absence of a credit boom in any major market and worries over the consequences of higher US interest rates for the first time since 2006.
The lack of a credit boom means that growth is more subdued than it was in the run-up to the global financial crisis.
In particular, there are fears about China’s growth prospects, given the recent bad news concerning weak credit demand, high real interest rates and tight liquidity. However, we see three reasons for at least some optimism. Read more
By Andrew Collier, Orient Capital Research
Chinese investors have discovered a new way to spirit money out of the country behind the backs of the country’s regulators.
In recent years, savvy investors have used false invoicing as a way to disguise their capital flight. A Chinese company pays $1m to a foreign company for a machine tool that is actually worth $500,000; the rest is invested in property or stocks in London or Sydney or New York. Read more
The second cut in China’s interest rates in three months reveals key elements in Beijing’s thinking as it tries to reconcile an economic policy agenda beset with conflicting priorities, analysts said on Monday.
The task before China requires some delicate manoeuvres. It aims to wean the country off an extraordinary debt binge (see Martin Wolf ) while keeping GDP growth fairly robust. It hopes to combat disinflationary pressures while preventing the renminbi from sliding too sharply against the US dollar. It wants to curb a dangerous slump in industrial profits without resorting to another round of investment pump-priming. It needs to keep domestic liquidity levels buoyant in spite of a surge in capital flight. Read more